As I mentioned earlier, Consumer Reports makes it sound easy for the average family to find $500 a month in saved expenses. Scott Burns calls this the “power of attentive spending.” Pay attention to the little details and you can end the year with $6,000 more in your pocket than you would have otherwise.
The $6,000 in “found money” is tax-free. By reclaiming money you’ve earned but might have spent, you’ve basically increased your income without adding any extra tax expense. It’s not technically correct, but it’s an interesting way of looking at saving money. Think of what else you could do to increase your *after-tax income* by $6,000.
You could get a raise or a promotion, but usually these things have to be deserved. Working harder at your day job may inspire your boss to reward you with a bonus, raise, or promotion, but to make that $6,000 increase in your pocket, you may need a $10,000 increase in your paycheck. Scott Burns points out that a $6,000 increase represents *six years of typical annual increases* for the average employee.
It will be just as difficult for many people to generate that same additional annual $6,000 through investments.
Suppose, for instance, you have the good fortune to live in a no-income-tax state and want to get all your return from a portfolio of common stocks. At a 15% tax rate on dividends, you’d have to collect gross dividends of $7,059 to net $6,000 a year. With the S&P 500 Index yielding 2.29%, you’d need to have $308,246 in your portfolio.
You might fare better in interest-bearing savings accounts. In the 33% tax bracket, you would need to earn $8,955 before taxes in interest income. Earning an annual 3.5% which is possible right now in a few high-yield savings accounts, you would need a starting balance of $255,864 to end up with $6,000 in taxes. That would be an additional $255,864 above what you have saved now.
Looking at these numbers, finding possible savings within expenses looks like a good option.
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{ 6 comments… read them below or add one }
I don’t think saving $6000 is better than getting a $6000 raise, but I do think it is easier. If you want to improve your cash flow, you have two conceivable options: (a) you can spend less, and (b) you can earn more. Option (b) is quite often not available. The only thing you can control for sure are your expenses.
This also reminds me of business school. The professor of controlling made sure that we got the following point. It is easier to save $1 dollar somewhere within the organization which goes straight to the bottom line than it is to earn another $1, only part of which makes it to the bottom line.
Okay, sure, for a lot of people this kind of thing is pretty useful. But for a lot of the kind of people who read this blog are probably not going to be able to get much in the way of these low-hanging-fruit savings. Bank fees? Phone costs? Are you kidding me? I looked, and not one of their suggestions applied to me at all, except – arguably – food shopping; admittedly, I’m single and without responsibilities, so I don’t even have life insurance.
I think finding a way to save $6k of your money is better than getting a $6k raise, based on the fact that you have already paid taxes on your money.
The better solution though, is to find a way to do a little of each. ;)
Credit card arbitrage.
Easy way to make lots of extra dollars.
Of course it’s better to save $6k, for exactly the tax reasons already stated.
Let’s keep it simple. Suppose you have $50 in hand, and you HAVE TO buy things that currently cost $100. So how do you get there? Well, if you can find a sale, or a substitute, and “save” $50 so that your $100-worth costs you only $50, then you’re home free.
But suppose you don’t go that route. Suppose you take the $50 in hand, and then you go out and earn your other $50. You’re there, right? $50 + 50 = $100. Um… NO. That second $50 is fully taxable. So that second $50 is really only (let’s say) $40. So in scenario 1, you have all the cash you need; in scenario 2 you have $50 + 40 = 90 but you’re trying to buy $100 worth of stuff. Good luck– maybe the store owner LOVES YOU and will give you a discount? If not, where’s that $10 coming from?
A penny saved is NOT a penny earned. A penny saved is a TAX-FREE penny earned.
I think finding a way to save $6k of your money is better than getting a $6k raise, based on the fact that you have already paid taxes on your money.
The better solution though, is to find a way to do a little of each. ;)